Fed's Dovish Pivot Unlikely Near Term as Dollar Climbs on Mixed Jobs Data

USD Strengthens as Rate Cut Expectations Diminish

The US dollar index surged to its highest point in a month on Friday, gaining 0.20% as market participants reassessed Federal Reserve policy trajectory. The greenback’s advance reflects a nuanced employment landscape: December nonfarm payrolls grew 50,000 versus the forecasted 70,000, yet simultaneously the unemployment rate tightened to 4.4% (down 0.1 percentage points from November). Average hourly wage growth accelerated to 3.8% year-over-year, outpacing the anticipated 3.6%. This mixed signal—weaker job creation offset by resilient wage growth and tighter labor markets—suggests the Fed may maintain its current stance longer than previously expected.

Sentiment indicators also surprised to the upside: the University of Michigan consumer confidence metric rose 1.1 points to 54.0 in January, exceeding the 53.5 consensus. However, inflation expectations drifted higher, with one-year expectations holding at 4.2% (above the 4.1% forecast) and five-to-ten-year expectations climbing to 3.4% from 3.2%.

Atlanta Fed President Raphael Bostic reinforced hawkish messaging on Friday, reiterating persistent inflation concerns despite labor market moderation. Derivative markets now price just a 5% probability of a 25 basis point rate cut at the upcoming FOMC meeting scheduled for January 27-28—a dramatic shift from earlier expectations.

Economic Data Snapshot

Key releases painted a picture of economic resilience with pockets of weakness:

Labor & Income: December nonfarm payroll additions fell short at 50,000 (versus 70,000 expected), with November revised downward to 56,000 from 64,000. The unemployment rate compressed to 4.4%, beating forecasts of 4.5%. Average hourly earnings accelerated 3.8% year-over-year, surpassing the 3.6% estimate.

Construction: October housing starts declined 4.6% month-over-month to 1.246 million, the weakest reading in five and a half years and below the 1.33 million projection. Building permits slipped 0.2% to 1.412 million but exceeded the 1.35 million forecast.

Sentiment & Inflation: Michigan consumer sentiment jumped to 54.0 from prior month’s 52.9, topping the 53.5 expectation. One-year inflation expectations stabilized at 4.2%, while the five-to-ten-year measure accelerated to 3.4% from 3.2%, both running above consensus.

Fed Policy Outlook Under Scrutiny

The probability of Fed rate cuts in 2026 has compressed significantly. Market pricing now suggests approximately 50 basis points of easing throughout the year, though this outlook faces headwinds. Speculation surrounding a potential dovish Fed Chair replacement—Bloomberg has cited Kevin Hassett as a candidate—weighed on the dollar earlier in the month, though the latest data has reversed this dynamic. President Trump is expected to announce his choice for Fed leadership in early 2026.

Complicating the easing narrative is the Fed’s ongoing quantitative easing via Treasury bill purchases ($40 billion initiated mid-December), which theoretically supports risk assets but may also validate the case for delayed rate cuts.

Global Central Bank Divergence Supports Dollar

The dollar’s rally is magnified by diverging monetary policies among major central banks:

Bank of Japan: The yen weakened to one-year lows as the USD/JPY pair climbed 0.66% on Friday. Markets assign zero probability to a rate hike at the January 23 BOJ meeting. Instead, the central bank is widely expected to hold rates steady even as it raises its economic growth forecast. Japan’s November leading index reached a 1.5-year high at 110.5, and household spending jumped 2.9% year-over-year—the strongest pace in six months.

European Central Bank: The euro slid to one-month lows (EUR/USD down 0.21%) despite better-than-expected data. Eurozone November retail sales rose 0.2% month-over-month (beating 0.1% forecast) and German industrial output expanded 0.8% month-over-month, defying expectations for a 0.7% contraction. ECB Governing Council member Dimitar Radev signaled satisfaction with current rates. Swaps show only 1% odds of a 25bp hike at the February 5 policy decision.

The policy divergence—with the Fed maintaining rates while rivals ease—naturally supports dollar appreciation.

Precious Metals Navigate Cross-Currents

Gold and silver rallied sharply Friday despite dollar headwinds. February COMEX gold settled up $40.20 (+0.90%), while March COMEX silver surged $4.197 (+5.59%).

Bullion gained support from President Trump’s directive to Fannie Mae and Freddie Mac to purchase $200 billion in mortgage bonds, a quantitative easing-style measure designed to stimulate housing demand. Geopolitical uncertainties—including US tariff policy escalation, Ukraine tensions, Middle East flare-ups, and Venezuelan instability—continue supporting safe-haven demand.

However, headwinds emerged: the dollar’s monthly peak pressured metals, and Citigroup estimates that commodity index rebalancing could trigger up to $6.8 billion in gold futures outflows, with similar selling pressure on silver. The S&P 500’s record close also reduced safe-haven appetite.

Central banks remain consistent buyers. China’s central bank added 30,000 ounces in December (the 14th consecutive monthly increase), while global central banks purchased 220 metric tons in Q3—a 28% surge from the prior quarter. ETF holdings remain robust: gold holdings touched a 3.25-year high and silver a 3.5-year peak in late December, reflecting persistent investor demand for portfolio diversification.

The upcoming FOMC meeting will likely be closely watched for any signals regarding 2026 rate trajectory, with markets currently pricing minimal cuts but remaining vulnerable to hawkish surprises or dovish guidance reversals.